Four reasons I'm 100% certain we'll get through this. I think.
1. "The crowd is always wrong."
Investment industry giant John Bogle reminded me of this in an interview the other night, and it's a sentiment that, more often than not, we can take to the bank. Because there's something in us, a fight-or-flight herd instinct, the shot of adrenaline that impels us to panic and bolt when a lion appears, useful if you're primitive man or a zebra on the veldt and anything but useful if you're modern man navigating the treacherous jungle of the marketplace. Especially when your panic is amped up by worried family, friends and co-workers and, inevitably, by the media.
The crowd is always wrong because the crowd always reacts and overreacts to danger in the marketplace. I've seen it happen in the only marketplace I've come close to understanding, real estate.
Of course, the danger is often—but not always—real. But when it's real, it's often—if not always—hyped. Today homes in some neighborhoods are selling, not at 2007 prices nor at 2005 prices nor even at 2003 prices, but at give-away 2000 prices. And it's about time, you retort, because that old devil sub-prime lending and, before that, the dot-com boom, pumped up local home prices far above their natural value, whatever "natural value" means.
Except that sub-prime lending on a massive scale was still a gleam in the eye of the mortgage banking industry in 2000, a miniscule part of the low-end market it would overwhelm five years later. 2000 prices weren't sub-prime prices.
And except that the dot-com dollars went, not into the low-end neighborhoods selling in 2008 for bargain 2000 prices, but into the upper-middle class neighborhoods that in 2008 are holding their value relatively well.
So the huge discount at the low end doesn't make sense. But the first rule of real estate and, I suspect, every market governed by emotion (and what market accessible to Main Street isn't?) is: it doesn't have to make sense.
This disconnect between perception and reality has nothing to do with how bright a market participant is. It has everything to do with human nature, tempered by attitude and experience.
2. "All the world's a stage."
Or "the crowd is always wrong", part 2. Maybe the crowd is always wrong because it turns information, much of it of dubious value, into catharsis: "emotional or psychological cleansing", says Webster's. We take our catharsis from drama, and these days we take our most elemental drama, not from religion and the arts as in the days of old, but from the 6:00 News. Which may explain why the 6:00 News has so little real news and so much heart-tugging drama. And why we tune in so religiously.
Catharsis performs a useful social function, but its seductive appeal has us seeing real-world events through the soap opera's distorted lens. Markets become caricatures, monumental clashes between cartoonish good and evil, earthly paradises or deadly mirages. We stampede into and out of markets, and the "stampede" light is always blinking.
Which might be good clean fun, but it's how you zig when you should've zagged.
3. No one wants to be the next Herbert Hoover.
Herbert Hoover, the "Great Engineer", would be remembered today as a real stem-winder, at least by the relaxed-fit standards of 1920s U.S. presidents, if the Great Depression hadn't happened on his watch. Like any good Republican, Hoover knew what government does in a market panic—not much (or in Hoover's case, plenty, very little of it involving the federal government, none of it effective)—because markets fixed themselves. They always had, sooner or later. The post-war recession of the early 1920s had been nasty but brief, although the early 1890s had seen a long and particularly deep depression.
But Hoover overestimated the healing qualities of market forces when left to themselves, at least when it's the Big One, and today he's remembered, rightly or wrongly, not as a great engineer, administrator and humanitarian, but as a poster boy for official cluelessness, callousness and economic do-nothing-ism.
Very few of Congress' current members had Hoover's exalted credentials when they took office. I think it's safe to say that even fewer of them want his legacy.
4. We're not living in caves.
Someone should add up all the catastrophes that were supposed to happen, were reliably predicted to happen and inevitably had to happen, and never did. If they had, we'd all be living, not in condos, sprawling ranchers and Tuscan villas, but in caves. Call it the dumb luck any species needs to survive or yet another example of 1 and 2, above.
In either case, we should find it reassuring that the average know-it-all—pundit, reporter, economist, the guy in the next cubicle—knows so little.